Insurance isn't meant to be so costly

Guarantee demands are placing an unbearable load on the building industry, says Miranda Devine.

The renovation tribulations of Phil and Amity, Gavin and Wazza and gang on the hit TV show The Block may make for riveting entertainment for real-estate-obsessed Sydneysiders, but the reality of the home-building market is far less pretty.

For real home renovators, the costs are skyrocketing, by as much as 40 per cent in the past two years. And the main reason is a shortage of builders caused by the insurance crisis and the catastrophic management of the home builders' warranty scheme.

Experienced builders are being forced to put up their homes as guarantee for the compulsory insurance they need just to start work on jobs worth more than $12,000. Thus, the remaining two insurance companies in the market have become de facto regulators, offloading their risk onto builders while happily accepting their increased premiums.

Young builders, without any assets and unable to get the bank guarantees required to start a job, are being forced out of business.

For 27-year-old builder Adam Regan of Orange, the stress involved in his ongoing inability to get insurance was the last straw. He committed suicide in April, on Easter Sunday. In a letter before he died to his local parliamentarian, Russell Turner, who had been trying to help, he wrote: "Due to not being approved my life has changed completely. These changes are directly related to obtaining Home Owners Warranty Insurance ...

"I have had to stand down an employee, a 20-year-old carpenter just out of an apprenticeship ... My girlfriend left me and town because of stress and my financial future ...

"All I am trying to do is earn a living and build homes for clients. Not having enough insurance is becoming detrimental to my business, my family and me. I am running out of time ..."

Adam's mother, Carol Regan, of Orange, said yesterday her only son used to visit his parents' house and cry "oceans of tears. He would just cry and cry and cry and say, 'What am I going to do?"'

In order to buy insurance so he could build a house, he was told he needed a $25,000 bank guarantee. His parents tried to help him, but since his father earned only $450 a week as a cleaner at the local hospital, they were only eligible for a guarantee of $15,000.

Adam had screwed his profit margin down so low on a previous job he needed the cashflow from the new job to pay off creditors who were phoning him day and night.

Since he was a boy, Adam had dreamt of being a builder or an architect, having inherited from Carol's father exceptional mechanical aptitude and spatial sense. He could fix car engines, gyprock a wall, tile a bathroom, drive a tractor or a backhoe, build a whole house alone.

He didn't want to declare bankruptcy because "he had so much pride", said Carol. He told her: "It's so hard to drive past other builders and people and know they're talking about me." His parents used to take food to him and even paid for petrol.

Adam's solution was to work harder. "No one worked harder than him," said Carol. "He worked from dawn to dusk. But when he died he only had 50 cents in his wallet."

Fifteen days after Adam died, the Minister for Commerce, John Della Bosca, announced an inquiry into the NSW Home Warranty Insurance Scheme, to be chaired by AMP director and insurance expert Richard Grellman. It was to be the fourth such inquiry in two years, and is due to hand down its findings at the end of next month.

The Master Builders Association's executive director, Brian Seidler, said yesterday that the industry was "hopeful" that this time there would be a "genuine" outcome.

Nineteen days after Adam died, Turner stood up in NSW Parliament and said his death was "an indictment on a system that has let him down and many other builders, especially our young builders, very badly".

Exactly two months after Adam died, a letter arrived at Carol's home, saying his insurance had been approved. "Too late," she said.

Peter Meredith, the MBA's director of housing, said yesterday that he had heard of other suicides in the industry. He gets calls every day from builders who are being pushed to the wall. "After four inquiries in two years, not a lot has changed. The insurers take no risk and have become de facto regulators where they call the shots ... on turnover and contract value a builder can do."

For example, one long-standing small builder employs two carpenters and one apprentice and has an annual turnover of about $1.5 million, which works out to about three Sydney houses a year. But his insurer concluded the company didn't have the financial capacity for more than a turnover of $800,000 a year. So the builder had to lay off the apprentice and one carpenter.

Apart from the heartache to the builder and his workers, there is the cost to the consumer. Renovating costs in Sydney are estimated to have trebled in the past five years, helped along by GST. Because so many builders have left the industry or had their workload curtailed, those left are in so much demand they can charge a premium. "If you're a builder and you're restricted to three or four jobs in any one year, you're going to maximise the profit because that's your only income," said Meredith.

The problem is only going to get worse, with building apprenticeships down 30 per cent and the prospect of a generation of building expertise disappearing.

In the end it is the small "mum and dad" builder who suffers, leaving the property market to large companies and project builders with the critical mass to afford insurance.

The Grellman inquiry is the industry's last hope. And while industry insiders are optimistic, worried insurers have been lobbying hard and may convince the Government to keep the status quo, with a little experimentation at the edges.